In reading the book by Extreme Money by Satyajit Das, FT Press, 2012,  the book provides a history of investment banking both the ups and downs, being cynical and the good it provides. Mr. Das includes many diagrams to help understand the complex world. In writing about hedge funds, Mr. Das writes today 30-40% of the hedge fund money comes from the usual suspects – the simply wealthy, Mafia barons, drug lords, arms merchants and despotic dictators. The rest comes from pension funds, insurance companies, mutual funds, foundations, endowment funds and the banks.

Investors were initially attracted by the great returns (the early funds people invested thousands to make millions- although for the past few years most investors after the fees are taken out, the returns are more often average. However for the folks who run the successful funds, the fees are great. Much of the gain comes from the very high use of leverage which accents both gains and losses. Funds Hedge funds have a wonderful ability to take advantage of bad government policy (George Soros and the Bank of England), bad corporate execution and planning, and a host of mismatched pricing of assets. The hedge funds seek out governments which are trying to stimulate their economy by keeping interest rates low, then the funds will come into the market to borrow and buy other governments safer dollars at a higher interest rate for a safe and profitable carry.

Linking to dividend paying stocks, while the headlines will always include a hedge fund, because there are always different views on the data – is the glass half full or half empty? the safer option is a long term one of stocks that have consistently paid dividends over the years. Not only does the price tend to be stable, but it also tends to increase more because to pay dividend implies a profitable company. If the company is not profitable, it will have to cut its dividend. Let the hedge funds look for mispriced securities and trade every second, while you buy very good companies and hold them for their continuing dividends. If hedge funds are interested in your company, a shakeup is in order which can be a good thing at the very least the stock price will be pushed up.

There are more questions than answers, till the next time – to raising questions